The US-China Economic and Trade Agreement, described as a “phase one” deal, entered into force today (30 days after signature, pursuant to Article 8.3, para. 1). The Agreement has created a temporary tariff truce. For the time being, it seems that tariffs will not be raised further, and both sides lowered their retaliatory tariffs to some extent, which is good news.
But with all the talk of tariffs, it is easy to lose sight of the U.S. concerns about Chinese trade practices. How does the Agreement do in terms of addressing the purported basis for the trade war?
The trade war began with a Section 301 investigation and report by the U.S. Trade Representative’s Office on China’s “Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation.” Pursuant to the Agreement, China has agreed to undertake new obligations in these areas. Will these new obligations successfully address the concerns? In this blog post, we offer some preliminary observations on this question, based on the text of the Agreement. A full analysis will have to await China’s actions to implement the Agreement. (Under Article 1.35, “Within 30 working days after the date of entry into force of this Agreement, China will promulgate an Action Plan to strengthen intellectual property protection aimed at promoting its high-quality growth.”)
The main findings of the Section 301 report were as follows:
• “China uses joint venture requirements, foreign investment restrictions, and administrative review and licensing processes to require or pressure technology transfer from U.S. companies”;
• “China deprives U.S. companies of the ability to set market-based terms in licensing and other technology-related negotiations”;
• “China directs and unfairly facilitates the systematic investment in, and acquisition of, U.S. companies and assets to generate large-scale technology transfer”;
• “China conducts and supports cyber intrusions into U.S. commercial computer networks to gain unauthorized access to commercially-valuable business information.”
In addition to these four findings, USTR also concluded that certain “other Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation may also burden or restrict US commerce.”
We will now go through each of the findings and evaluate whether, and to what extent, it has been addressed in the Agreement.
Forced technology transfer
In the Section 301 report, USTR found that China uses its foreign investment policy to encourage technology transfer by foreign companies to their Chinese joint venture partners. American (and other foreign) companies are forced to partner with Chinese companies in exchange for entering the Chinese market, and as part of this arrangement, the foreign companies have to share their technology with the Chinese partners.
Ideally, the requirement that foreign investors use joint ventures would be eliminated. In the Agreement, China does not make commitments to open its market (other than the financial services sector) to wholly owned foreign investments. However, recently, outside the context of the Agreement, China announced that it would lift foreign capital restrictions in some manufacturing sectors, including aircraft and automobile manufacturing, within several years. This will help ease forced technology transfer concerns to some extent.
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